Legal function: ensuring workforce policies

Social sustainability: The legal function plays a crucial role in ensuring solid workforce policies and safeguarding workers’ rights across the value chain.

To help companies navigate the impacts of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), our Sustainability Legal thought leadership series aims to address key issues from a labour perspective for General Counsel’s and legal leaders and provide practical steps to help ensure business readiness for compliance with emerging reporting and compliance requirements.

A shift from soft to hard law

Legislators are attaching increasing importance to social sustainability standards – e.g. the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD Guidelines). Legal functions including their labour lawyers, together with sustainability and human rights specialists, play a key role in helping their organisations to navigate these developments. This role includes identifying and understanding risks related to company workers, workers across the value chain and affected communities, as well as ensuring social sustainable practices across the supply chain through contractual assurances from supply chain partners.

Our two other articles in this series examine the legal duties and responsibilities of directors and shareholders along with opportunities for better governance within this changing legislative landscape and how companies should report on environmental performance across the value chain. This article will examine how the legal function can address related risks and opportunities that will likely be revealed through sustainability-related reporting under frameworks such as CSRD and GRI, and due diligence processes under regulations such as CSDDD.

1. Corporate Sustainability Reporting Directive (CSRD)

Reporting on sustainability policies and performance is no longer at each company’s own discretion. Under the CSRD, businesses in scope need to report on their strategies, impacts, risks and opportunities according to the European Sustainability Reporting Standards (ESRS).

While the CSRD focuses on reporting, it also raises questions that go beyond compliance. So while the legal function – in collaboration with sustainability, reporting, and compliance teams – needs to ensure that the company complies with ESRS requirements, it can view this as an opportunity to drive sustainable business value.

To illustrate how the legal function can help drive social sustainability, let’s take a look at ESRS S1 (own workforce) and ESRS S2 (workers in the value chain).

ESRS S1 and S2: Own workforce and workers in the value chain

ESRS S1 and ESRS S2 set reporting requirements on ‘social’ factors covering a company’s own workforce (S1) and workers in the value chain (S2). The dilemma here for companies is that their responsibility is broad and extends along the value chain, beyond the areas within their immediate control. The information that’s required to be disclosed includes insights into workforce characteristics, working conditions, collective bargaining, non-discrimination, health and safety, well-being and diversity and inclusion. Data included in this information can relate to employees, people working for or on behalf of the company, or those affected by its operations (workers in the value chain).

Compliance with applicable laws and regulations is a fundamental requirement for organisations under the CSRD. This includes adherence to labour laws, employment standards, and health and safety regulations. In most countries, these kinds of regulations are already embedded in laws related to employment contracts, working hours, minimum wage, leave entitlements, and discrimination, harassment and diversity reporting regulations. As individual countries continue to introduce new laws on issues such as human rights, organisations need to ensure that they keep pace with these new national or industry requirements as well as complying with the CSRD. These developments all link back to the UN and OECD principles mentioned earlier.

2. Corporate Sustainability Due Diligence Directive (CSDDD)

The CSDDD was approved by the European Parliament in April 2024, and the deadline for transposition by Member States is expected in the course of 2026. Aiming to stimulate responsible business conduct by building on the OECD Guidelines¹, it will impose a legal obligation on in-scope companies to conduct human rights due diligence. Companies will be expected to prevent, mitigate and remedy negative human rights impacts by implementing these six steps:

Embed responsible business conduct into policies and management systems
Identify and assess the most severe adverse impacts (this can be achieved through a human rights salience assessment, provided that right-holders or their proxies are adequately engaged)
Cease, prevent, or mitigate adverse impacts
Track the implementation and results of policies implemented and actions taken
Communicate clearly how impacts are being addressed
Provide for or cooperate in remediation when appropriate.

Because adverse impacts on human rights can change over time, the due diligence process is continuous in nature.

Complying with the CSDDD

It will be essential for the legal function to collaborate with teams that specialise in labour law, sustainability, human rights, risk and compliance; have an in-depth knowledge of business operations and value chain; and have the skills needed to implement rights-holder engagement and technology-based solutions to manage the huge amounts of information required to fulfil due diligence obligations. It is vital to recognise that responsibility for compliance goes right to the top of the organisation: senior management must be involved.

To illustrate how the legal function can successfully contribute to the due diligence process and ensure compliance with CSDDD, we highlight some key labour rights:

Freedom of association ensures that workers and employers have a voice and are allowed to form and join organisations to represent their interests (e.g. trade unions). However, due to increased flexibility in the labour market resulting from the platform/‘gig’ economy, this right has become inaccessible to a growing number of people.

Collective bargaining is rooted in the The International Labour Organization (ILO) constitution and closely linked to freedom of association. It is a negotiation process, supported by legal frameworks, including national labour laws and international labour standards. Conducted through trade unions or other representative bodies, it is used by employers and their organisations to achieve agreements that regulate terms and conditions of employment.

Conducting due diligence and contract management across the extended value chain can be challenging. In-scope issues could range from declining union membership and anti-union strategies by employers to legal restrictions in some jurisdictions that weaken collective bargaining.

The International Labour Organization's definition of social dialogue includes all types of negotiation, consultation or exchanges of information between/among government representatives, employers and workers, on issues of common interest linked to economic and social policy.

Social dialogue processes can be informal or institutionalised and are often a combination of the two. It can take place at national, regional, or enterprise levels, be inter-professional, sectoral or a combination of these factors. Facilitated by structures like works councils, collective bargaining agreements, and consultative commissions, it fulfils a vital function – enabling cooperation and ensuring workers' participation in decision-making processes that affect their work and lives.

Potential difficulties can include power imbalances, political instability, lack of trust among parties, and the evolving nature of work in the platform economy.

The International Labour Organization (ILO) recently reached an agreement on the living wage. This recognises that “decent wages are central to economic and social development and to advance social justice. They also play an essential role in reducing poverty and inequality and ensuring a decent and dignified life.”

While due diligence over this issue is relatively straightforward in a company’s own workforce, it’s much more challenging for value chain workers. Reasons for this include limited visibility into value chain partners, and differences between minimum wages and living wages in various countries.

Lack of pay transparency is one of the key obstacles to closing the gender pay gap. Achieving parity is a top priority because the pay gap has a long-term impact on the quality of women’s lives, on their risk of exposure to poverty and on the persisting pension pay gap (at around 30% in the EU).

To this end, the European Council adopted a new directive on pay transparency in April 2023. EU companies must now share information on salaries and take action if their gender pay gap exceeds 5%. The directive includes provisions on compensation for victims of pay discrimination and penalties for employers who break the rules.

Companies must report on their performance in this key area under the CSRD. Under the CSDDD, they must take steps to identify, mitigate and prevent any negative impacts arising from a lack of pay transparency across their extended operations. It’s likely to prove challenging. To be compliant, companies will need visibility into all workers with employment contracts and all applicants for employment in their own business, and in supplier organisations.

Key steps should include engaging with employees, compiling the data needed to understand pay practices, and determining the nature of any pay gaps.

How can PwC help?

Compliance with CSRD and CSDDD will be challenging and complex. We’ve developed specific offerings to support implementation efforts for all five of the key workers’ rights covered in this article – freedom of association, collective bargaining, social dialogue, living wage, and pay transparency.

We support the implementation of freedom of association and social dialogue through:

Corporate human rights due diligence

The CSDDD propels the need for sustainability due diligence to the heart of companies’ risk management agendas. The United Nations Guiding Principles on Business and Human Rights provide a globally recognised framework for the duties and responsibilities of governments and business enterprises in this key space.

Corporate human rights due diligence involves four core components and PwC offers support on each of them:

(a) Identifying and assessing actual or potential adverse human rights impacts that the enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships.

(b) Integrating findings from impact assessments across relevant company processes and taking appropriate action according to its involvement in the impact.

(c) Tracking the effectiveness of measures and processes to address adverse human rights impacts in order to know if they are working.

(d) Communicating on how impacts are being addressed and showing stakeholders – in particular affected stakeholders – that there are adequate policies and processes in place.

Enterprises should identify and assess risks by geographic context, sector and business relationships throughout their own activities (HQ and subsidiaries) and across the value chain.

We support the implementation of living wage and collective bargaining through:

Living wage

To help companies find the pathway to a living wage that works best for them and their employees, we’re collaborating with WageIndicator Foundation to demystify the journey by providing companies with practical pointers at each step of the way and benchmarks to navigate by. Our new guide Working towards paying a living wage explains what paying a fair and sustainable wage means, why it matters, how to achieve it and how to report on its impacts.

Social dumping

Social dumping describes companies seeking to maximise profit through lower labour costs in another country or company. PwC helps companies to create processes that ensure their suppliers and subcontractors offer decent pay and working conditions.

And we support the implementation of pay transparency through:

Equal Salary

No aspect of gender equality is under greater scrutiny than how organisations treat – and reward – their male and female employees. PwC helps companies identify and close gender pay gaps, enabling them to both comply with gender equality rules and also enhance their reputation with customers, regulators, employees (both current and prospective) and the public at large. PwC’s Global Gender Pay Compass summarises the most important facts on gender pay equality legislation and sanctions. And as a preferred partner of the Switzerland-based non-profit organisation EQUAL-SALARY, PwC is authorised to perform EQUAL-SALARY audits. Companies that successfully pass the audit can gain EQUAL-SALARY certification, which they can then promote in their internal and external communications.

PwC’s Legal Business Solutions global sustainability teams combine a breadth of legal and commercial capabilities and expertise to help businesses effectively understand their regulatory requirements and develop strategies for compliance that deliver business value. Working with organisations across the world. We help support approaches to managing compliance across the spectrum of environmental, social and governance regulations and standards. Together with our strategic technology alliance partners, our human-led, technology powered approach enables us to evaluate regulatory risk and compliance, and helps legal and governance teams to develop an ecosystem that integrates legal requirements with leading industry practices.

_{¹Please note that the OECD Guidelines were updated in July 2023 and named the OECD Guidelines for MNEs on Responsible Business Conduct. This guiding document reflects both the UN Guiding Principles, 2011 (UNGPs) and the OECD Due Diligence Guidance for Responsible Business Conduct (2018).}

Authors

Nicolien Borggreve, Partner, PwC Netherlands

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Chris Perkins, UK and International Employment Law Partner, PwC United Kingdom

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